Breville Group Limited (BRG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Breville Group Limited 2022 Full Year Results Investor and Analyst Briefing. [Operator Instructions] I would now like to hand the conference over to Martin Nicholas, Group CFO. Please go ahead.

Good morning to everybody joining today's call. It's my pleasure to welcome you to our full year 2022 results call. I'll be walking you through the group's trading performance and then Jim Clayton, our CEO, will provide an operational and strategic update. We would like to start our presentation by acknowledging and paying our respects to the traditional custodians of the land and waters on which we work, the Gadigal people of the Eora nation, and to their elders past, present and emerging. We celebrate the continuing contribution of their food culture and seek to support it in both Australia and the world. Turning to Slide 4 in the beginning of our presentation, we'll begin with an overview of our results. We're pleased with FY '22. We had a very solid year of performance against the dynamic and evolving backdrop. Sales grew by just under 20%, and we successfully leveraged our pricing power to sustain global segment gross margins in the face of inflationary pressures. We continue to strategically reinvest in the growth drivers of marketing, R&D and technology across the year whilst demonstrating our tactical ability to align our expense level as sales growth moderated in the second half. And reliably, we met our EBIT guidance of AUD 156 million delivering another year of double-digit EBIT growth. With EPS increasing 15% to $0.759 per share, our full year dividend of $0.30 per share, 100% franked, reflects the group's target payout ratio of 40%. In terms of cash flow, as forecast, FY '22 was a year of cash outflow as we rebuilt working capital levels to equilibrium from their artificially low and operationally restrictive levels a year ago. We also successfully pulled forward some of our peak inventory to help partially derisk first half '23 sales. So all in all, another challenging but positive year. Sales grew solidly, margins were well managed, and we reinvested into future growth drivers at a rate that delivered double-digit and on guidance EBIT. As with previous years, we did what we said we would do. Turning to Slide 5, we see key segment performances. Our strategically key Global Products segment grew by nearly 20% or 18% in constant currency terms. We successfully raised price in this premium segment in all geographies to protect our gross margin percentage in the face of inflationary pressures. In the Mass Market Distribution segment, we also saw good sales growth with Nespresso back in stock and solid growth in Breville Local, offsetting slower growth in our lower-end Kambrook brand. Gross margins in this distribution segment were more affected by inflationary pressures, given the lower retail value per unit shipped and higher shelf price sensitivity. Importantly, however, the distribution segment was again successfully managed to fulfill its strategic role of generating profit dollars for reinvestments in the growing global segment. Turning to Slide 6. Although today, we're reporting on FY '22, I thought it was worthwhile stepping back to take a look at what has happened over time. This slide shows the impact of our growth strategy and the progression of the Global Products segment from FY '18 through to FY '22. The portfolio is now nicely balanced with EMEA and APAC of roughly equal size and together equivalent to the Americas. Moreover, in terms of multi-growth -- multiyear growth, our consistent strategy of investment in NPD, new product development, complemented by enhanced digital marketing and geographic rollout have delivered a compounded annual growth rate of over 22.5%. Different regions have led the charge at different times, but together, they have more than doubled the business over the last 4 years. As we look to FY '22 through FY '23, we will certainly be navigating through a dynamic environment with opportunities to lean into, risks to be faced, and as you would expect, tactical mitigants in play. Jim will talk more specifically about this at the end of his section. But with our consistent strategy in play, a successful inventory pull forward, our new product development pipeline beginning to release and our geographic new entries continuing to mature, we believe that we are well placed to deliver attractive growth in the medium term. Turning back to FY '22 on Slide 7. Here, we see the breakdown of the global growth by theatre. We see second half '22 strength in the Americas, partially offsetting the softness in EMEA and another solid performance from APAC. The Americas, our largest region, is also our fastest-growing region in FY '22 at 22.7%. Growth accelerated in the second half as the theatre return to an in-stock position and consumer sellout proved resilience, with second half reported growth of 32% or 24% in constant currency terms. After a strong first half '22, EMEA slowed in the second half, with consumer nervousness following the Russian invasion of Ukraine exacerbated by a general retailer destocking. We didn't engage in the widespread discounts seen in the market in the second half '22 and our sales declined by 15.9% in the second half over the PCP but, interestingly, overall, our market share held. Conversely, APAC delivered a solid performance in both sell-out and sell-in across the first half and second half. And we saw good signs of things to come from the early performance of our new coffee SKU, the Barista Express Impress in New Zealand. And for the future, I should remind you that June saw our first direct entry into Asia as we launched in South Korea. So overall, another strong example of our portfolio working for us and delivering good results in volatile times. Turning to Slide 8. Our strategy of reinvesting in the growth drivers of the business continued in FY '22. On this slide, you can see that 50% of our gross profit increase of $36 million was reinvested into these growth drivers. Around 22% was absorbed in overhead, mainly increased supply chain costs; and $20 million or 28% is delivered as an EBIT increase. What's also behind this chart is the reality that as sales growth moderated in the second half, we demonstrated the ability to align our expenses with revenue within a guidance envelope. We successfully cut our cloth to fit our sales performance. This is how we run the business and how we reliably met our EBIT guidance of $156 million plus in investing in future growth. Now to Slide 9 and turning to the balance sheet. Here, we clearly see the impact of working capital recovering to an equilibrium level, and they deliver a pull forward of a portion of peak inventory to partially derisk the first half of FY '23. Last year, I told you that the group's working capital position of $160 million was at least $80 million below equilibrium, this insufficient landed inventory, resulting in constrained sales and unusually low receivables. In FY '22, we have successfully rebuilt that $80 million and have pulled forward some of first half '23 stock as our manufacturing partners have remained in full operation. The group typically builds to peak inventory in September of the year, allowing deliveries to customers in October and November to in turn meet peak seasonal consumer demand in November [Audio Gap] and costing this peak inventory earlier than normal. To be clear, to meet our expected first half '23 sales, a significant amount of stock still needs to be built and landed, but this pull forward helps at least partially derisk our first half '23, and it is in the $446 million inventory held at 30th of June 2022. Our receivable days remain well controlled and within terms at 61 days and reflects a more normal sales pattern than in the prior year as well as exchange rate movements. Our higher payables balance largely reflects the inventory pull forward in May and June and general business growth. And our fixed asset increases reflects a stepped-up investment in production tools as new products are ready for release. Our intangibles are growing in line with the business as we continue to strategically invest in product development. As at 30th of June 2022, the group had a net debt position of $4.1 million. Our reduced net cash reflects a year of cash outflow as working capital was normalized and then the inventory was pulled forward. An assessment of our evolving supply chain risks will inform our approach to inventory holdings in FY '23. That said, the negligible obsolescence risk of our products makes holding stock a very sensible mitigant to current supply chain uncertainties. Finally into Slide 10. Before I turn over to Jim, a few key points I'd like to reiterate about our FY '22 performance. Firstly, another good growth year both on top and bottom line as we have consistently implemented our strategy. Secondly, the business has more than doubled in size over the last 4 years with a diverse geographic portfolio capable of absorbing shocks in a particular region. This year, it was Ukraine. Previously, it has been Brexit, Trump's tariffs and COVID. Thirdly, the business is well controlled and demonstrated both pricing power to protect gross margins and an ability to align expenses with sales to deliver EBIT as planned. Fourthly, we have successfully rebuilt working capital and partly derisked first half '23 sales by deliberately pulling forward some of our inventory build for peak season. And lastly, we did what we said we would do, a net EBIT guidance of $156 million. And on that note, I'll pass over to Jim Clayton, our CEO, to provide an operational and strategic update.

Thank you, Martin. And good morning, everyone. On Slide 11, over the last couple of months, on multiple occasions, investors have asked me to include a section of this presentation on how we think about inventory. Admittedly, I'm a bit frustrated by this for a couple of reasons. First, if you comp Breville against the other companies in the market over the last few years, you'll find that Breville is consistently the most efficient in the world at managing inventory despite our lack of scale, making this an odd metric to be discussing. And second, inventory is not a relevant predictor of future performance unless we don't have enough of it, meaning other metrics are infinitely more important from an investor's perspective. Nevertheless, if there is still confusion in the market over the topic, it means I've not done a sufficient job of explaining why it's the wrong metric to focus on. For this, by definition, I own the disconnect, so I'm going to take time out of the presentation this morning to try again. Slide 12. The first inventory-related question. Martin has just reported an ending inventory in June of $446 million, $100-plus million of which is goods in transit. Is this a high number or a low number? The answer is that given its June 2022, neither. It's a deliberate choice we've made, which I signaled in our first half '22 presentation, and reinforced again at the Macquarie Investor Conference in May, so it certainly shouldn't be a surprise. On this slide, I've done some back of the envelope math for you beginning with the first half of '22 with a ground-view analysis. The question we're trying to answer here is between the months of June and December, how much product that Breville build, transport, land and sell to report our first half '22 numbers? In December of 2021, we reported an ending inventory number of $293 million. This is the amount we have to cover January and February sales. If we had our first half COGS of $516 million and then subtract our starting position at June of $217 million, we can answer the question. Between the months of June and December of 2021, we manufactured and landed $592 million of product, $516 million of which we sold through the retail. Using the same equation, you confer dart at the first half of '23. You know the starting position in June, it's $446 million, with our December 22 ending inventory assumption for X. Don't forget, you need to cover January and February sales. And your first half '23 COG assumption in for Y, and you can derive how much we still have to manufacture and land to deliver the first half of '23. Using a fairly wide range of assumptions, if you could do the math, you'll see we're somewhere in the neighborhood of $400 million to $550 million short. Net-net, while we have certainly derisked our July '22 position relative to how we started last year, we are still chasing a big number. We are working as hard as we can to get it moved as quickly as we can to derisk the chance that our first half '23 number is negatively impacted by either China's COVID 0 policy or a log jam in the supply chain, both of which we experienced last year. Slide 13. This is a slide I presented at the UBS conference in November of 2019 with one added element. This slide shows an aggregated view of a single SKU across ANZ, North America and the EU in 2018. The dark blue line is the actual sell-out curve. For the SKU, sellout is relatively stable from January through October. In November, it spikes on Black Friday and again in December for Christmas. To make a point so everyone doesn't get confused. This is the behavior of this particular SKU. If I pick a different one, you might see a different pattern. For example, an ice cream maker would also show a demand spike in July given it's summer in the northern hemisphere. If the solid blue line is the sellout pattern, the dotted line represents the theoretical sell-in line. It's just an offset. If retailers could perfectly predict sell-out, they would want to take delivery of the SKU about 4 weeks before they sold it. The dotted line is the one we report to you as revenue. With that pattern set, the important line for our discussion today is the green line. This line represents inbound inventory. No manufacturer can run flat for 10 months of the year and then deliver 4x that run rate over a 2-month period. To manufacture and deliver the number of products we need for the holidays, our manufacturers must start climbing the mountain much earlier. In a normal year, our manufacturers start working against the holiday demand in June. This means we take delivery of product in July that we may not sell until October. This production continues at an increasing slope across July to October. Beginning in November, manufacturing begins to ramp down to get back to the second half run rate. Make sure we're all tracking, there's nothing unique about this manufacturing product -- pattern. For every product company like Apple that faces a seasonal demand spike, you'll have a manufacturing pattern that resembles the one on this slide. To foreshadow a bit. When we report our inventory at the end of June, we are actually seeing 2 distinct pieces: first, the inventory we are holding to support the sell-in of July and August; and second, inventory we have started to accumulate to meet the spike of demand of October through December. Slide 14. In this slide, also a variant of a slide I presented in 2019, I'm giving you an illustrative example of how we are executing our purchasing pattern for the first half of '23 versus the first half of '18. In FY '18, the green bars, we had a predictable supply chain. We started the Christmas ramp in May, we were leaning into inventory receipts starting in August. But in 2022, we have an unpredictable supply chain, meaning potential delays which is the combination of congestion at ports and potentially China's COVID 0 policy. To derisk not having the inventory before the [ settlement ] period, we began our first half 23 holiday build in March, trying to get as much of it done as possible by September. If you look at June '22 against June '18 on this chart, you'll see a higher inventory number in June because of our phasing. To be clear, both the green and blue bars in this chart add up to the same number of units. This means that at the end of June, we are not reporting too much inventory. Instead, we are reporting the inventory that we deliberately landed by the end of June. And as shown in the previously Slide 11, we still have quite a bit of inventory to build and land in order to deliver the first half of '23, regardless of your growth assumption. Thus, what you're actually looking at in our June inventory number is the amount of risk we have taken off the table. You can back in to how much risk is still on the table. Again, just to make sure we're all on the same page, this is a deliberate choice based on facts on the ground and insurance policy of sorts. Once the risk comes out of the supply chain, we'll adjust the pattern back to our normal build pattern, just like we did when we manage through Brexit. Slide 15. The other rule of thumb I've heard thrown around is too much inventory is a leading indicator that future gross margins will suffer. While this rule might work for retailers or a seasonal or short life cycle product company, it does not work for Breville and many other companies. Let's put it to the test. What does a hammer, a Rolex and a coffee machine have in common? Believe it or not, if you oversee the company's supply chain, all 3 are exactly the same. They are long life cycle, nonseasonal products with seasonal selling patterns. This means consumers buy the same product every month of the year, year after year, but you might sell more in Christmas than in other times of the year. During its history, as Rolex ever had too much inventory of a particular watch in a country during a particular month, surely. But have you ever seen a Rolex priced at 50% off in an inventory clearance sale? Never. Well, if you don't discount to clear the extra inventory like a retailer would, then what do you do? It's simple. You just buy less of it in forward months and let the consumer monthly demand take the SKU back to equilibrium at full margin. Then you turn the purchases back on to keep up with consumer demand in forward months. In hopes of not needing to talk about this topic again, let me say it bluntly. In the 7 years I've been at Breville, have we ever had too much of a particular coffee SKU in one of our warehouses? Absolutely. And over the same 7-year period, what is the number of times we have discounted coffee machines to move what we consider to be excess inventory at that moment in time? Exactly 0 times. This does not mean we do not promote. While we as a company are not particularly promoted, we typically execute a handful of promotions throughout the year. We actually have to bring in more inventory to support them. There are many potential drivers for this, typically share a voice through a retailer, which is rarely because of an inventory position. We're better off selling it at full margin over time. The actual drivers of our gross margin tends to be, first, the mix of distribution segment versus global segment. Second, global segment product mix; and third, global segment channel mix. inventory position just doesn't come into play. Slide 16. To sum our size. Each year, we decide the amount of inventory we are going to buy for our holiday demand spike as well as the monthly build pattern. In February, I told you I was going to pull forward the holiday inventory build to derisk the supply chain. By May, China has shut down Shanghai. Recognizing the virus spreads in Macquarie conference, I told you I was going to accelerate the pull forward even further given the facts on the ground. As of June, we achieved $446 million of inventory, though $100 million was goods in transit. That was the best our manufacturers could do. Across July and August, we have been hammered down trying to get our holiday inventory into our warehouses with the goal of avoiding the impact of any future delays. $446 million of inventory at the end of June is a deliberate operational decision. I would have taken more if I could have gotten it. On the margin front, I'm hopeful that everyone now understands why inventory and gross margins are not particularly correlated in this vertical. And if you ever doubt yourself, just ask, what would Rolex do? There is, however, one very important correlation related to inventory, and that is the correlation between inventory and revenue. If you do not have inventory, you will not have revenue. The R squared is 1. This is the relationship that matters in this vertical. As a final comment on the topic, some retailers have been reporting elevated inventory numbers. This is not Breville inventory. As we started FY '23, all our retailers around the world have a good channel weight with a couple of exceptions where they were running a little tight. No retailer started FY '23 with too much Breville inventory. Slide 17. Now I'll transition to a topic that is relevant for future performance, which are our new products in the first half of '23. Slide 18. For the last 4 years, we have been in a multiparty collaboration to launch the aboriginal culinary journey range. We launched the range of the National Museum of Australia in Canberra in May, where the originals are now on exhibit. This is a limited edition range with all the profits being donated to charities that create opportunities for indigenous Australians. Slide 19. This was an extremely ambitious project, and it took a village. Alison Page, the founder of the National Aboriginal Design Agency deserves much of the credit for bringing the participants together, which included Breville, The National Museum of Australia, the Department of Foreign Affairs and Trade. Dr. Terry Janke, an expert in First Nation's intellectual Property Law and 4 extremely talented and world-renowned aboriginal artists. Slide 20. This project had 2 core objectives. One, to enable the artists to tell stories of country using Breville products as the candidates. Each product represents contemporary design and reflects 65,000 years of ongoing Australian indigenous culture, the fusion of aboriginal and modern Australian design; and two, to define a gold standard for how corporates can engage indigenous culture in their work. Slide 21. In Australia, we launched the range at the National Museum of Australian and partnered with David Jones and Qantas Reward Stores, retail partners. Throughout the first half and the beginning of the second half of FY '23 we, in combination with the National Museum of Australia and the Department of Foreign Affairs and Trade, will be launching this range in London, Berlin, Paris, Brussels, New York and Washington, D.C. In each city, the range will be launched at a local museum in partnership with one premium retail partner. As an example, in London, we will launch the range of the British Museum, and Harrods will be our partner. We will be putting Australian aboriginal stories of country into kitchens all over the world. I encourage each of you to go to acj.breville.com to learn more about the project. It is, without a doubt, the most complex and ambitious project Breville has ever been a part of. It is also the project we are most proud of. Slide 22. Now to a product with the development cycle that doesn't end, a first for Breville. Slide 23. Shortly after I joined Breville, I was asked when we were going to launch a connected product, I answered only when we have to. This is because connectivity adds complexity, which means you have to deliver enough incremental value to justify it. In March, we launched the Joule Oven Air Fryer Pro in the U.S. and Canada. And as shown by Wired Review caption, we cleared the value-added product Wired 7. Breville's new countertop air fryer oven can be controlled by a mobile app. Unlike with many other connected appliances, that's a good thing. And looking at the reviews the product is getting at William Sonoma, consumers agree. This is a down payment on Breville's transition from a product company to a solutions company. With this product, we are not trying to sell you a better oven. That would be too easy. The target we are aiming for here is to make you a better cook. Slide 24. In a pure hardware model, once the product is launched, all features and capabilities are frozen, the only way to improve the product is to start over and build another one. Within the solutions model, new features and capabilities continue to be released after the hardware cycle is over, just like your iPhone. Said another way, the product we launched in March is actually the worst version of the product we will ever have. We will be launching food guides in the first half. Instead of cooking from recipe with a food guide, you tell the app what you're trying to put, and that will give you insight into how to achieve a great result with the oven. Slide 25. When we launched the oven in March, the March, the ChefSteps and Breville Test Kitchen teams that optimized 115 recipes for the oven. By the end of December, we expect to have 400. Customers who bought the oven last March are getting an even better, more useful oven every month. Most compelling addition is our content ecosystem. In addition to ChefSteps and the Breville Test Kitchen, optimizing recipes for the oven, our customers will also get optimized recipes with The New York Times, bon appetit, America's Test Kitchen, Williams Sonoma, Serius Eats and an ever-expanding list of chefs in the U.S. These partners have never allowed their content to be used like this, a first for many of us. It is through the seamless combination of hardware, software and premium content that will make you a more accomplished cook, something we could never do with hardware alone. Slide 26. I'll finish my section of the presentation with the other new products that will have their first holiday season. Slide 27. The new color range for the first half of '23 is Red Velvet, which will be available across a wide range of our products. Slide 28. Barista Express Impress which was launched in New Zealand in May and Australia in July, will be launched in the other markets in the first half of '23. This product, which won the Best New Product award at the Specialty Coffee Association Conference in Boston and the Best of the Best reddot award is yet another installment in helping customers make cafe-quality coffee at home. It has an intelligent dosing system that ensures the customer doses the right amount of coffee in the portafilter's, coupled with an assisted tamping mechanism to deliver a properly prepared coffeepot every time. This will also be the first product to go through our launch version [ 3.0 ] process, a process designed to maximize a new products run rate at launch versus version 1.0 that phased the rollout across retailers. Slide 29. We are also launching 2 new accessories for the espresso range, The Dosing Funnel and The Puck Sucker. The Dosing Funnel helps minimize any mess in the dosing process and helps you get an even tamp. The Puck Sucker is quite an innovation. One of the frustrating parts of the Espresso workflow is banging the coffee puck out of the portafilter after you've pulled the [ shaft ] . It's loud, not the most enjoyable process and can sometimes leave a bit of mess on the [ benchtop ]. Puck Sucker solves this problem. With this accessory, after you pull the [ shaft ], you place the portafilter on The Puck Sucker. Product creates a vacuum and pulls out the puck. I've had an early production model at my house for the last few months, and it is ranking very high in my personal best Breville product ever category. Slide 30. In Australia, we -- we have launched 2 versions of the AquaStation. These products were developed by our local Australian team as a further evolution of the Aquaport acquisition, much like the Breville Air range. These products have many consumer advantages; large water capacity, a longer lasting and faster filtration process, and instant hot water at selected temperatures with volumetric control. The global theatre teams were so impressed by these products, they are picking them up and will launch them in markets outside ANZ. Slide 31. I I'll end with the first new product to launch from the Breville Barista collaboration. This project started shortly after the acquisition closed. Many consumers getting into specialty coffee would like to have a single coffee grinder to use across various coffee drinks, espresso, [indiscernible] , et cetera. Unfortunately, no company has been able to effectively deliver this for a simple reason. Grinding sweet spot for espresso is really small and the sweet spot for filter is quite large. The grinder designed for filter coffee is under resolved for espresso and a grinder designed for espresso is over architected for filter. This problem exists for a very simple reason. Every grinder in the world has one thing in common. Each step-click of the grind setting moves the grinding burr a fixed distance. Slide 32. With the Encore ESP, Baratza is going to launch a first-ever solution to this problem. The Encore ESP has 40 branding steps. The first 20 steps will move to the upper burr 40 microns per set, giving fine resolution for dialing an espresso. Steps 21 through 40, is a moving into the range that requires a coarser grind, the slope adjust and each step will move the upper burr 90 microns per step. This gives you the resolution and control you need to dial an espresso while also giving you the resolution you need to dial in filter coffee. Product also includes a static-free dosing cup for [ 54 mm and 58 mm ] portafilters to make the espresso workflow process easy and clean. As I've said previously, first half of '23 is the beginning of the release of all the new products we've been working on during the COVID period. And with this first batch, we are leaning into 2 of our strongest categories, coffee and ovens. We're excited about these new products, and those already in market are performing well. Slide 33. I'll end my section with an assessment of FY '23 as it looks today. FY '23 is setting up to be a competition between headwinds and tailwinds, starting with the headwinds that apply to everyone. It's what you read in the Wall Street Journal. Ukraine war in its second and third order effects on Europe and the world, a strengthening U.S. dollar across all currencies, making the purchase of products priced in U.S. dollars more expensive, and the continued rise of inflation coupled with the various central bank's efforts to not get back by raising interest rates. Against these market-wide headwinds, we have the tailwinds of FY '23. At the macro level, employment levels are high, consumers are in a strong balance sheet position, and logistics costs are beginning to drift downward versus last year. In addition to this macro push and pull, Breville specifically has tailwinds resulting from the strategy we have executed over the last 7 years. Slide 33 is the beginning of our new product launch wave, the unlocking of all the R&D work we did during COVID, and we'll be using our Launch 2.0 process for these new products, process designed to maximize the launch revenue trajectory for a new SKU. All of the countries we entered during COVID and before will be 1 year older, increasing the proportional relevance. We have the market rollout of both Baratza and Lelit ranges across our direct markets. With this class of tailwinds and headwinds, we have a series of risks to manage. First and foremost is the supply chain. We are not done with this one, it's just morphing, though as a general rule, improving. China's COVID 0 policy hangs like the sort of [indiscernible] because of its binary implication. In the logistics leg, it's a game of Whac-a-Mole. Reasons differ, but the result is the same, managing against delay. To date, because we pull forward our first half '23 deal, we've been able to absorb the various delays across the system without affecting sell-in. How the war in the Ukraine evolves and how long it lasts will matter in the EMEA theatre. And lastly, we may see some retailers getting financial challenges. As of the start of FY '23, we've gotten in front of what we can. We've pulled our holiday build forward to the extent our manufacturers could deliver. We've hedged our net Aussie dollar exposure at USD 0.74 and we provisioned for potential credit risk exposure. As with the prior 2 years, we've bet on black and red at the same time. We start with the tight cost structure, land inventory to cover the upside, then true up our expense and inventory levels in the second half. Lastly, we use our product and geographic revenue diversification to our advantage by leaning industry to take pressure off of the areas more challenged. As with FY '21 and FY '22, it means getting in front of variables we can control, both risks and opportunities of positioning the company to react quickly to any surprises along the way. As I've said every year at this time, July and August are not very predictive of first half performance. With that caveat, I can say that as of today, sell-out is up, and we are on plan for the first half. Net-net, no surprises yet. Slide 34. That concludes my section of the presentation. I'll now hand back to the operator to open up the call for any questions you might have about our FY '22 results.

[Operator Instructions] The first question today comes from Lisa Deng from Goldman Sachs.

Just 2 questions from me. The first is actually about this transition from a product to a solutions model. Obviously, we now have a longer life time for the actual hardware but a lot more solutions to draw in the consumer. How do we actually see a change in our revenue model please? Or how do we monetize this additional value provided?

It's something that plays out over time. So for now, and I mean FY '23, FY '20 and so forth, think of it as hardware acceleration. So you monetize it by selling more hardware. An example I would give you, if you go back 15 years or whatever it was, was when Apple launched the App Store that was not -- that didn't change their revenue model. In fact, it was a cost center at the time. What it did was accelerated hardware and actually bankrupted about 90% of the other phone providers. If you look at Apple 15 years later, you see something very different where the app store has become a part of their kind of recurring revenue and so forth. So it has long-term option value. But in the short run, especially coming from a hardware base just like Apple, you're going to be driving hardware acceleration as the core ROI.

And is the price point higher as well even for the hardware? And how much by if so?

It is. The easiest way is to go to Winston, and I'm going to comment, just look at the delta. So the BOV900, I think it's $399 but this is U.S. I'm not making this up. I think the -- this new oven is $499, I think -- it's about $100. And then if you do the black stainless steel version, I think that may be another $50. Anyway, just better...

Got it. And I know you don't want to talk inventory anymore, but it's more about our confidence that the retailers don't have any sort of excess inventory, and therefore, we won't be discounting per se due to excess inventory that you mentioned. How do we get confidence on retailers not having excess inventory and the fact that the demand will be there to digest this early build? And then also, in terms of the inventory, is there any way to split for us what is sort of existing product versus new product that we're launching?

That's a lot all balled up in the one. So how do we get -- how do I know that the retailers didn't have too much inventory? The short version is because I can see it. So we track across all markets sell-out and sell-in, and we have visibility for most of our retailers. We have visibility into the amount of inventory they hold. That was really important during COVID, and I say that because we were not allowing them to buy more than we wanted to. So that's how I know how they started and that it's not Breville inventory. So that's directionally factual. I guess the other thing you could do, I guess, at least in Australia is you could call around to the retailers and say on July 1, did you have too much inventory. So let's see, that was one part of your question.

How much is new product?

How much is new product? So the -- I don't know, meaning in percent. You have to conceptually think about it. We've got about 100 -- I don't know, 100 products plus or minus. We have the new products that -- in-flight right now is the oven and the Barista Express Impress under the new launch process, we've leaned very heavily into pulling in a lot of stock before we launch. So that's certainly in there. But the way -- Martin, you might have a little bit of...

I don't think we're going to monetize it, but it certainly was part of the pull forward. As in the beginning we said, we pulled forward some of July, August, September inventory. We were certainly looking into the launch of the BES876 in the States, for example. So -- of the inventory holding, about 60% of our inventory holding is in the Americas and about 50% of our sales is in Americas, and some of that differential will be accounted for by launches to come rather than launches that are actually in play at the moment.

I think that just to pounce on that one. The other reason the U.S. is intentionally overstated in a sense. So when we do this big holiday build, we have to build for every country that we sell into, some 120 [indiscernible] , some 240 and so forth. So as a part of this production plan that we lay down every year, we also decide the order, meaning who's going to go first. Are you going to build Australia first? Are you going to build Australia last? This year, we brought the U.S. to the front of the queue because of all the mess we dealt with the L.A. port last year thinking that the U.S. was going to be the region that was going to potentially suffer from the longest supply chain delays. So we really leaned into the U.S. in that March, April, May kind of time frame to try to clear them out and then move on to others. And that's why when you get to the end of June, you've got this heavy U.S. tilt in that number. But we still have to make all of it for everyone. Like so the problem doesn't go away. It's just where you're going to take the logistics risk.

[Operator Instructions] The next question comes from Apoorv Sehgal from UBS.

Okay. My one question, then I'll focus on the Europe result. So if we look at constant currency sales, as you said, sort of down about 15% year-on-year in the second half. Can you give us a view for what that's looked like over, say, April, May, June. Because presumably in the first three months of the half, you're probably growing double-digit year-on-year. So I just want to get a feel for what the decline sort of looked like in the last few months. And whether from your perspective, have things got any better over July, August please?

So actually, I don't have the answer to the first one. What I can tell you in July through August is that across all theatres, sellout is up year-over-year.

Okay. So clearly, there's been a recovery then in Europe logically?

Yes. I think you have to be careful when -- remember, what we were reporting to you is sell-in, right? Sellout is the mean reversion line. So retailers can play all kinds of gains along the way with their own inventory, but ultimately, you get back to mean reversion. So what you would have seen at some point in the second half with Ukraine and everything else is retailers pulling back on, uh-oh, what's happening. Well, that can stall out sell-in, but that doesn't -- you still got sell-out trickling or whatever it's strictly at, right? So once they figure out and kind of get grounded, then they can realign all of the various inventories against the sell-out line. So when we go through these periods, these discontinuity periods of sorts of like this, I just stare at the sell-out line because I know that's where the mean -- that's the line we need to be lining up behind, and the retailers will manage their own kind of stuff in between, but we'll all head back to that line. So again, this is the last 6 weeks. I just pulled it because I know you guys would ask, which is I looked across every theatre. Sellout's up on the global segment in all 3 theatres. So maybe, and I'd say maybe, we've gone through the retailers' kind of pulling the stick and doing different things that they do on sell-in, and now everybody's got a lineup for holiday and so forth, and maybe it will stabilize a little bit.

The next question comes from Alexander Mees from Morgan.

Just with regard to working capital but not inventory, Martin, could you talk through the increase in the receivables and the payables? I'm sure the payables are up by 66% is to do with the higher inventory purchasing. But just interested in color on that and also receivables, if there's any issues with credit risk at this stage?

Yes. Sure, Alexander. Payables, you're quite right. The biggest driver in that movement is actually the inventory pull forward and that we haven't paid for all of it yet. So that one was quite simple, business growth plus that pull forward. Receivables is also quite simple in that in answer to your last question first is the only problem with receivable today is absolutely not the rock solid at about 61 days. I think at this time last year, they were 59. So they basically stayed in the same pocket, and that number is really to do with the shape of sales. So May and June last year were particularly low as we ran out of inventory. This pulls us back to the inventory number and May and June were much more normal this year. So the main number that I look at is receivables days. And at 61 days, I'm very comfortable with it.

And so we should assume that that's a number to forecast going forward?

And indeed. If you look at the receivables balance as a percentage of sales, annual sales if you like, you'll see that FY '22 is a very normal number and FY '21 was a very unusually low number.

The next question comes from Keegan Booysen Boson from Jarden Group.

First question for me is just around the NPD pipeline. So you've given some pretty good color for the first half '23, with the focus on coffee and ovens. Can you talk to some of the other categories you might be focusing on later in sort of second half '23, '24 and whether the NPD is going to be accessory-driven or new category-driven, please?

I can't. Sorry, I don't. That's just not something we disclose. So the engine, you have to imagine, I mean, at some level, have been working on stuff over the last 3 years. So it's the whole team has been working all the way through. So there wasn't -- it's whatever our resource allocation was during in a sense 3 years ago than 2 than 1. But over the next, about 2 years, you're going to see products not only in these 2 categories but in other categories as well. Accessories are just a little bit of a pickup, and those are much smaller project.